Carr warns Obeid claims may hurt federal Labor

Foreign Affairs Minister Bob Carr says Labor will have to work hard to offset damage to its reputation in New South Wales as a result of corruption allegations against Eddie Obeid.

Mr Obeid, a former state MP and Labor powerbroker, is embroiled in an Independent Commission Against Corruption inquiry, and stands accused of making millions of dollars from inside knowledge of government decisions on coal leases.

Mr Carr told Sky News federal Labor could take a hit at the next election as a result.

The former NSW premier says the party will have to campaign on economic grounds, particularly in western Sydney.

"I think the party is clearly challenged, the ICAC inquiry is one subset of those challenges," he said.

"I think Labor's got to work very hard to emphasise the things that we have done for the people of western Sydney.

"Labor can stand on every street corner of western Sydney and say, 'we saved your jobs with our response to the global financial crisis and you've got interest rates at a colossal low which means thousands of dollars more that you've got to spend on your kids and on the rest of your family.'"

Meanwhile, NSW Premier Barry O'Farrell says he has received clear legal advice against suspending the mining leases at the centre of the corruption inquiry.

Speaking to Channel Ten, Mr O'Farrell rejected the State Opposition's calls to scrap the leases.

"Our advice is clear, we don't have the power to do what John Robertson, the Labor leader of New South Wales is asking us to do, which is to scrap those leases," he said.

"What's clear now is that Labor's learnt nothing, because the Opposition Leader wants us to scrap those licences, which would open up the state to hundreds of millions of dollars of compensation."